MONTREAL - Economic
performance in Taiwan and Hong Kong continues to
outpace mainland China, where a slowdown is
anticipated.

Last week Taiwan announced
its exports grew 10.3% in February over February
2011 as the earlier Chinese New Year holiday this
year allowed mainland factories to restart
production earlier in the month, particularly in
the electronics sector, according to the Republic
of China's Finance Ministry.

Those
factories on the mainland assemble components
produced in Taiwan for export to third countries.
The so-called "base effects", however, could not
account for 17.6% year-on-year

growth in export orders
in February, which followed an 8.6% decline in
January.

Industrial production and the
Purchasing Managers' Index (PMI) appear to confirm
the rebound, although the 8.4% increase in
February industrial production was lower than the
8.8% consensus revealed by a Bloomberg News
survey, and in fact fell 6% when adjusted for
seasonal factors.

Nevertheless, the PMI
compiled by HSBC/Markit jumped to 52.7 from 48.9
in January, the first time in nine months it has
registered above the neutral 50 level. But
unemployment rose from 4.18% to 4.25%, the highest
among its regional peers (including Hong Kong,
Singapore and South Korea), while the seasonally
adjusted rate fell 0.44 percentage point
year-on-year to 4.15%.

In Hong Kong,
unemployment in February (seasonally adjusted)
also rose from 3.2% in January to 3.4%, equivalent
to the rate for the whole of 2011 but well below
the rate for 2010. The city's secretary for labor
and welfare said that, all things considered, the
rate could encounter "some upward pressure" in the
months to come.

Hong Kong's exports rose
14% year-on-year, well exceeding the 5% consensus
expectation, following a 9% contraction in
January. Asia was the most powerful driver; within
Asia, the driver was China, where roughly half of
Hong Kong's exports go. Inflation fell to 5.4%
year-on-year in February, from 6.7% in January.

It is best to look at economic performance
over the first two months of the year together. On
that basis observers caution that Taiwan and Hong
Kong do not match up with the February pace, taken
by itself. How anodyne one is about this fact
depends on one's more general predispositions
about the Chinese economy. Taiwan has already
begun making formal plans on how to deal with what
it expects to be a slowdown on the mainland during
the coming months.

So far the stock
markets, which are leading economic indicators
suggesting what investors anticipate economic
performance will be, are neither unconcerned nor
terribly concerned. Thus it bears noting that both
the Taiwan and Hong Kong stock markets have
outperformed the Chinese ones.

Among the
benchmark equity indexes, the Taiwan Stock
Exchange Composite (TSEC) Weighted Index and Hong
Kong's Hang Seng Index are both up between 13% and
14% since the beginning of the year, while the
Shanghai Stock Exchange Composite (SSEC) has risen
only slightly more than half of that.

The
SSEC kept pace with the TSEC, which the Hang Seng
outperformed, up until the beginning of the
Chinese New Year; however, the SSEC reopened
afterwards with declines while the other two have
continued advancing, and it has never made up the
difference. The first two have been in trading
ranges since about mid-February, while the last
has declined below its level at that time.

The SSEC, after breaking through its own
long-term support at the 2,380 level to the
downside, has just this week plummeted through a
former short-term at the 2,320 level. Having
earlier failed to break through its post-crisis
second-fan to the upside, it is now testing the
support at the 2,245 level, below which a very
long-term support appears only at the 2,150 level.

By contrast, the TSEC has closed over a
third of the early August 2011 gap-down from 8,317
to 7,976 with a short-term high of 8,144 although
it has receded slightly since then; while the Hang
Seng, in contrast to the SSEC, has (so far)
successfully penetrated its post-crisis second-fan
to the upside.

It was following the
presidential and parliamentary elections in
January that the Taiwan market really took off
towards the upside, but the Hong Kong market has
so far barely reacted to Leung Chun-ying's defeat
of the business lobby's candidate, Tang Ying-yen,
in the contest to become Hong Kong's chief
executive.

Scandals around the latter
compelled Beijing to switch its support to Leung.
News stories speak of Leung's "election", but it
would be more correct to describe his victory as
an "appointment", decided as it was by a
1,200-person committee, itself appointed by
Beijing.

As far as economic performance
per se is concerned, the first two months of the
year make it necessary to wait at least for full
first-quarter statistics in order to determine,
first, how jolting the first bump of the Chinese
"landing" will be and, second, how deleterious
that will be for the other two markets in "Greater
China".

It is likely that the growing
political uncertainty in Beijing, crystallized for
the moment around disgraced Communist Party senior
official Bo Xilai, has contributed to doubts over
future economic performance by drawing attention
to the fact that instability can come from the top
as well as from the bottom of the political system
on the mainland.

Dr Robert M Cutler
(http://www.robertcutler.org), educated
at the Massachusetts Institute of Technology and
The University of Michigan, has researched and
taught at universities in the United States,
Canada, France, Switzerland and Russia. Now senior
research fellow in the Institute of European,
Russian and Eurasian Studies, Carleton University,
Canada, he also consults privately in a variety of
fields.